NGOs and the Law

Country Reports: South Asia

The International Journal
of Not-for-Profit Law

Volume 3, Issue 3, March 2001


First Report of the Task Force on Laws Relating to the Voluntary Sector

  1. The joint Machinery for Collaborative Relationship between the Government and the voluntary Organisations met in June 2000, with the Deputy Chairman, Planning Commission, presiding. The meeting decided that the DG CAPART would organise discussions to reexamine laws relating to the VOs. Accordingly, he convened a meeting on 25 October 2000, of a number of persons from the voluntary sector as well as representatives of the Planning Commission and the Central Board of Direct Taxes. As decided in this meeting the Planning Commission set up a “Task force on Laws relating to the Voluntary Sector”, on 3 November 2000. A copy of the planning Commission’s Memorandum setting up the Task Force is at Annexure 1. The task asked to make Its recommendations on the Income Tax Act in December 2000, and on other laws by April 2001.
  2. The Task Force met on 16 November and 23 November to consider the change in the Income Tax Act and procedures of the department, so that recommendations on these could be made to the Ministry of Finance (Department of Revenue) by about mid-December, At these meetings Ms. Deepa Krishan, Director (TPL-I), CBDT, a member of the Task Force was not present, much to the regret of the other members, as her contributions to the discussions would have been of great value.
  3. The Task Force considered the various provisions of the Income Tax Act from the point of view of ironing out difficulties experienced by NGOs, without taking away from the basic features of the Law. For this purpose the Task Force discussions were greatly facilitated by and drew upon the experience of NGOs engaged in varied activities in many fields, as well as the suggestions and recommendations made by many of them including the Voluntary Action Network India (VANI) and the Indian Centre for Philanthropy. The Task Force is grateful to CAPART which had put together a compilation of such suggestions and recommendations.

The task Force also considered that the provisions of the Income Tax law should facilitate larger and smoother flows of grants/ donations to NGOs from income tax payers of all categories. The NGO sector has in the recent decades grown very significantly in terms of numbers, the diversified fields of activity and the spread in the country. NGO experience in many fields has been noted by government departments which have utilised it in improving their own official programmes in terms of approach, content and methodologies of implementation. In terms of approach, content and methodologies of implementation. In major programmes of the government aimed poverty in the rural areas, for example, government programmes of he few years have acknowledged the pioneering and innovative work of NGOs in different parts of the country. Partly such NGOs have had the support has been from foreign sources whether multilateral, bilateral, or from development- funding NGOs abroad . It is high time, the task Force feels, Indian donors should be given the right signals in the Income Tax law to induce them to increase their donations/grants to the NGO sector. It is not necessary any longer for the tax law to indicate preferences or priorities for particular fields of developmental activity. This point has been taken care of in the new definition of “charitable purpose” referred to later in this Report. Another point in the same vein lies in the resource crunch faced by practically all State governments, and to some extent the central government also, which has constrained the free flow of adequate funds for a variety of programmes for the poorer people, considering their very large and growing numbers; there is enough room for government departments as well as the NGO sector, and the latter obviously. One may note also that in many programmes NGO performance has been more cost-effective than that of official agencies.

The recommendations of the Task Force have been framed in the light of the considerations above and are set out in the following.

  1. VANI had recommended that “charity” should be distinguished from ‘development’ and ‘training and skill development’ should figure in the Law. In this connection there has been a suggestion of the CBDT that “charitable purpose” as defined in Section 2(15) of the Income Tax Act may be replaced by “charitable purpose including relief of the poor, education, medical relief, and the advancement of any other public cause or object for social environmental welfare including economic empowerment and development of the weaker and disadvantaged sections for sustainable livelihood and social justice”. The Task Force noted that this definition is of an inclusive nature, and should cover all activities of NGOs deserving public support. Accordingly, the Task Force noted that this definition is of an inclusive nature, and should cover all activities of NGOs deserving public support. Accordingly, the Task Force recommends that this definition should be incorporated in the Act.
  2. The Task Force noted that NGOs generally need to build a corpus fund for sustainability an stability of their organisations, and make efforts to obtain donations/ grants for their corpus funds after duly resolving to establish such funds. The Task Force felt that a specific provision in the Income Tax Act is necessary allowing for NGOs to set up corpus funds and for exempting from income tax the donations/ grants received for the corpus funds including any grant to an NGO generally to support its objects.
  3. Any NGO whose gross income does not exceed the general income limit for exemption from income tax—presently Rs. 50,000 in the year— should be exempt from income tax.
  4. The task force felt that it would be in order if deductions from taxable incomes of donors, under any provision of the income tax law, are allowed only for donations made by cheques or demand drafts on banks, Where the donor indicates his PAN (Permanent number from the Income Tax Dept), he should be entitles to 100% deduction of the donation from his taxable income.
  5. The limits on the amounts of donations for the purpose of determining the exemption from income tax in the hands of the donors should be removed.
  6. The present wording of Section 10 (23 C) sub clauses relating to eligibility for complete exemption for tax of all income of an NGO engaged in activities of importance to a state or the nation, needs to be modified so as to include activities which may be taken up by the NGO in a part of the state or the country in terms of the new definition of “ charitable purpose” recommended above in para 4. The present wording gives room for an individual officer of the Income Tax department to apply it in a narrow manner, for instance that an NGO works only in a part of a state, and therefore cannot be considered for exemption under this section.
  7. Any capital gains accruing to an NGO should be exempt from tax if it is used/applied for activities in furtherance of its objects.
  8. i) The Act should be modified so that income from income generation projects of an

NGO is not treated as business income attracting Section 44AB.

ii) NGOs registered under section 12 A of the Act should be entitled to receive interest on investments made by it (within the categories permitted under section 11(5) of the Act) with out deduction of income tax at source on the interest amounts.

  1. Section 11(2) of the Act should be modified to do away with the percentage stipulations applicable to expenditure from grants/donations received by an NGO for particular programmes or projects, so that no unspent balance is liable to tax. It should be left to the person or the agency making the grant/donation to make sure that it is spent properly.
  2. Section 13(3) (b) has a monetary limit of Rs. 50,000 for the cumulative contribution to an NGO by a person, above which he is considered a key person. All transactions with that person come under scrutiny. This monetary limit would be too low for a regular donor contributing say just Rs. 50,000 or 6,000 a year to an NGO, because in 8-10 years that donor would become a key person. Large NGOs like CRY would have to track hundreds of donors cumulative contributions for years, not knowing when any of them would cross the monetary limit. As an alternative, the Task Force suggests that instead of a monetary limit, say 1 per cent of the cumulative income of an NGO, or Rs, 50,000, whichever is higher, amy be stipulated. With such a small financial stake a donor will not be able to manipulate the NGO’s affairs, and the intention of the law will be met.
  3. Far too often the intention of the law in providing exemptions from taxable income under different sections is defeated by the delays in disposal of applications from NGOs under Section 80G, 35AC, 10(23C) etc. The Task Force recommends that where an NGOs application is complete, it must be disposed off with in say 60 days, or 90 days, as may be appropriate for applications under different sections, at the end of the period, the exemption sought should be taken as automatically granted, unless within that period the departmental officer raises any serious queries on any matter furnished in the application. If an application is rejected, the reasons for the rejection must be clearly specified, so that the NGO can appeal to a higher departmental authority against the rejection, or ask the first authority to review its decision.
  4. The Task force feels that if the government amends the low on the lines recommended above, the NGOs on the other had should accept the obligation to make public sufficient details of their affairs to enable interested people to from informed opinions of the worth of NGO’s work. It is suggested that where an NGO is given a dispensation under one or the other Section Providing for exemption of donations from income tax, or is allowed complete ex3emption of its income from tax, the NGO should have its accounts and the annual reports of its activities to the Tax Officer also publish in local newspapers the abridged audited accounts and a sufficiently informative reports of its activities for that year. Local people in the area of the NGO’s work would be the best placed to judge how it has performed. The NGO should furnish to the tax officer copies of the material published thus in local newspapers. Failure of an NGO in this regard should automatically lead to its losing the tax exemption dispensation. This condition may not perhaps apply to NGO’s which are engaged in only training, facilitation and funding support to other NGO’s and have in direct activities in the field.
  5. There are thousands of small localised NGO’s in the country who have not registered themselves under the Income Tax Act, or field returns under the Act. They need to be helped to come into the mainstream, without attracting penalties. It is recommended that some sort of a voluntary disclosure scheme may be framed, under which they could register themselves now, and be excused from penalties for the omission to do so in the past and for not filing returns.
  6. The Income Tax department should develop a database for donations by tax payers for which they claim and have been given exemptions from tax. It is necessary that this database is published and is available to researchers, the NGO community, and the general public. The database could categorise donations by donations different categories of tax payers, the Sections of the Act under which exemptions have been allowed/claimed, the categories of NGOs and the purposes/ activities for which the donations were made.
  7. The Task Force feels that officers of the Income department need to be given through orientation and training in this area of their work of administering the Income Tax Act.
  8. It would be very desirable for the department to set up standing committees at the CBDT level and in the Commissioneries (various IT offices), to which NGOs can represent their grievances and suggestions for improving the interfaces between the department and NGOs.
  9. Certain other suggestions received are shown in the Annexure 2 to this Report.


Subject: Setting up of a Task Force on Laws relating to Voluntary Sector  

In the meeting of the Joint Machinery for Collaborative relationship between GO and VOs held in June 2000 under the chairmanship of Deputy Chairman. Planning commission. It was decided that I CARPART would organise discussions on re examining laws relating to voluntary sectors. A meeting on the subject was organised on 25th October 2000 under the chairmanship of DG. CAPART. In pursuance of a decision taken in the above reterred meeting it was decided to constitute a Task Force on Laws relating to Voluntary Sector.

The composition of the Task Force would be as follows:

  1. Shri. V.B. Eswaran -Chairperson
  2. Ms. Pushpa Sundar ICP – Member
  3. Shri. Anil Singh VANI -Member
  4. Shri. P.M. Tripathi Avard – Member
  5. Shri. Shankar Ghose NFI – Member
  6. Shri. Mathew Cherian CAF – Member
  7. Shri. Sanjay Agarwal AccountAid – Member
  8. Ms. Deepa Krishan, Director (TPI-I) CRDT – Member
  9. Representative of D o legal Affairs – Member
  10. Representative of Legislative Department – Member
  11. Representative of D o Women & child Dev – Member
  12. Representative of planning Commission – Member
  13. DDG. CAPART – Member- Secretary

The following would be the Terms of Reference of the Task Force.

  1. To examine the various laws particularly Central laws dealing with Voluntary sector.
  2. To take a view on the representations made by various VOs. NGOs about difficulties being faced by them in meeting the requirements of these laws and procedures there under.
  3. To make appropriate recommendations for removing the immediate difficulties and constraints by suggesting a set of amendments and changes to the existing legislations and rules & procedures etc.
  4. Task Force would make recommendations on the Income Tax Act by December 2000 and on other Acts by April 2001.

CAPART headquarters, New Delhi will service the Task Force. CAPART will provide necessary administrative assistance including the secretariat staff.

The Task Force may invite any official or expert as and when required.

Annexure 2

  1. It is suggested that provisions of TDS except in the case of salaries, should be made not applicable to all such payments for registered organisations u/s 123A.
  2. The approved investments definition should be expanded and investments by voluntary organisation in Sec. 25 companies should be allowed.
  3. A specific provision in the Income Tax Act is necessary allowing for NGOs to set up the corpus funds and for exempting from Income Tax, the savings out of donations/ Grants received for the Corpus Fund.
  4. The organisations which publish and disseminate widely their annual report can furnish the copies of their annual reports to the Tax Officers.

Explanation for inclusion of the above mentioned sentence in para. 15: keeping in mind the costs involved in publication of such report in national dailies for VOs which are working in the national capital or other metropolitan cities, this provision needs to be made optional.

Publication and wide dissemination of annual reports by the VOs giving the kinds of activities undertaken and expenditure incurred by them should be considered sufficient to ensure transparency. These annual reports should be submitted to the tax officers.

  1. Para 15: the recommendation that every NGO should publish an abridged statement of accounts in a local newspaper, is not realistic. Space in newspapers is extremely costly, and no newspaper can afford to donate such space to hundreds of NGOs. This requirements will, therefore, prove irksome. All NGOs should be required to publish an annual report containing an accounts statement and their activities, and it should be available to the public on demand.
  2. Para 17: While the recommendation re database is most welcome, we should also request that the database should categorize charitable trusts into donating, fund receiving, and both. This would help the compilation of information material useful to grant seekers, and even for policy purposes.
  3. Individual donors: Individual salaries employees at present do not get benefit under section 80G for purposes of TDS deduction by the employer under section 192. An employee is therefore forced to claim refund, or claim the benefit in his tax return if filed separately. It works as a disincentive for the salaries classes to give donations. To encourage charity (and especially in view of pay roll deductions) tax benefits should be available while deducting tax from the employees payrolls on the strength of the appropriate certificates from NGOs.
  4. Exemption from donations in Kind: Presently tax benefit is available only for donations in cash. Donations made in kind including services, shares, works of art, equipment, etc. are not covered. The provisions of 80 G should enlarge to cover donations in kind and also the money equivalent of technical/professional services in kind and also the money equivalent of technical/professional services rendered through deputations, secondments, etc. to charitable organisations.
  5. Just as other interest groups are invited for a pre-budget consultation the voluntary sector should also be invited to make a representation if any.